FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1996 Commission File Number: 0-15245
ELECTRONIC CLEARING HOUSE, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 93-0946274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28001 DOROTHY DRIVE, AGOURA HILLS, CALIFORNIA 91301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 706-8999
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
At December 31, 1996, 12,050,079 shares of common stock, .01 par value, of
the Registrant were outstanding.
Total Sequential Pages: 13
ELECTRONIC CLEARING HOUSE, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION 3
Consolidated Balance Sheet 4
Consolidated Statement of Operations 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION 11
SIGNATURES 13<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<PAGE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<CAPTION>
December 31, September 30,
1996 1996
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 313,000$ 172,000
Restricted cash . . . . . . . . . . . . . . . 534,000 516,000
Accounts receivable less allowance
of $351,000 and $289,000. . . . . . . . . .1,178,000 901,000
Inventory less allowance of
$26,000 and $20,000 . . . . . . . . . . . . 733,000 579,000
Prepaid expenses and other assets . . . . . . 29,000 36,000
Notes receivable from stockholders
and related parties . . . . . . . . . . . . 37,000 50,000
Total current assets. . . . . . . . . . 2,824,000 2,254,000
Noncurrent assets:
Property and equipment, net . . . . . . . . .1,473,000 1,489,000
Real estate held for investment, net. . . . . 252,000 252,000
Other assets, net . . . . . . . . . . . . . . 778,000 687,000
. . . . . . . . . . . . . . . . . . . . $5,327,000$4,682,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt . . . . . . . .$ 935,000 $1,044,000
Accounts payable . . . . . . . . . . . . . . 228,000 178,000
Accrued expenses. . . . . . . . . . . . . . . 1,273,000 794,000
Total current liabilities . . . . . . .2,436,000 2,016,000
Long-term debt . . . . . . . . . . . . . . . . . 570,000 597,000
Total liabilities . . . . . . . . . . . 3,006,000 2,613,000
Stockholders' equity:
Convertible preferred stock, $.01
par value, 5,000,000 shares authorized;
Series "H", 23,511 shares
issued and outstanding . . . . . . . . . . .
Series "K", 425,000 shares
issued and outstanding . . . . . . . . . . . 4,000 4,000
Common Stock, $.01 par value,
20,000,000 shares authorized;
12,050,079 and 11,571,804 shares
issued; 12,043,838 and 11,565,563
shares outstanding.. . . . . . . . . . . . . 121,000 116,000
Additional paid-in capital. . . . . . . . . .12,081,000 11,884,000
Accumulated deficit . . . . . . . . . . . . . (9,885,000) (9,935,000)
Total stockholders' equity . . . . . . . 2,321,000 2,069,000
. . . . . . . . . . . . . . . . . . . . $5,327,000 $4,682,000
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months
Ended December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Revenues:
Bankcard processing revenue. . . . . . . . . $2,858,000 $1,776,000
Bankcard transaction fees. . . . . . . . . . 1,020,000 633,000
Terminal sales and lease revenue . . . . . . 153,000 401,000
Check guarantee fees . . . . . . . . . . . . 26,000 42,000
Research and development . . . . . . . . . . 30,000 20,000
. . . . . . . . . . . . . . . . . . . . 4,087,000 2,872,000
Costs and expenses:
Bankcard processing expense. . . . . . . . . 2,883,000 1,763,000
Cost of terminals sold and leased . . . . . 153,000 346,000
Check guarantee . . . . . . . . . . . . . . 10,000 21,000
Customer service . . . . . . . . . . . . . . 104,000 99,000
Selling. . . . . . . . . . . . . . . . . . . 7,000 17,000
General and administrative . . . . . . . . . 725,000 642,000
Research and development . . . . . . . . . . 90,000 63,000
. . . . . . 3,972,000 2,951,000
Income (loss) from operations . . . . . 115,000 (79,000)
Interest income. . . . . . . . . . . . . . . . 13,000 8,000
Interest expense . . . . . . . . . . . . . . . (65,000) (52,000)
Loss reserve for notes receivable. . . . . . . (12,000)
Income (loss) before income taxes . . . 51,000 (123,000)
Income tax provision . . . . . . . . . . . . . (1,000) (1,000)
Net income (loss) . . . . . . . . . $ 50,000 ($124,000)
Net income (loss) per share . . . . $ .004 ($ .011)
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Three Months
Ended December 31,
1996 1995
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . 50,000($ 124,000)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . .47,000 45,000
Provisions for losses on accounts
and notes receivable . . . . . . . . . . . . . .75,000
Provision for obsolete inventory. . . . . . . . .6,000
Changes in assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . . .(18,000) 19,000
Accounts receivable . . . . . . . . . . . . . . .(339,000)(213,000)
Inventory . . . . . . . . . . . . . . . . . . . .(160,000)(167,000)
Prepaid expenses and other
current assets . . . . . . . . . . . . . . . . .7,000 (2,000)
Other assets, net . . . . . . . . . . . . . . . .(91,000)
Accounts payable . . . . . . . . . . . . . . . .51,000 410,000
Accrued expenses. . . . . . . . . . . . . . . . . 479,000 (282,000)
Net cash provided by operating activities . . . 107,000 250,000
Cash flows from investing activities:
Purchase of equipment.. . . . . . . . . . . . . . . (31,000) (31,000)
Net cash used in investing activities . . . . . . . (31,000) (31,000)
Cash flows from financing activities:
Repayment of notes payable. . . . . . . . . . . . . (38,000) (10,000)
Common stock warrants exercised . . . . . . . . . .44,000
Proceeds from exercise of stock options . . . . . . 59,000
Net cash provided by (used in) financing activities 65,000 (10,000)
Net increase in cash . . . . . . . . . . . . . . . . .141,000 209,000
Cash and cash equivalents at beginning of period . . . 172,000 97,000
Cash and cash equivalents at end of period . . . . . .$ 313,000$ 306,000
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of presentation:
The accompanying Consolidated Balance Sheet as of December 31, 1996, the
Consolidated Statement of Operations and the Consolidated Statement of Cash
Flows for the three-month period ended December 31, 1996 and 1995 are
unaudited, but in the opinion of management include all adjustments necessary
for a fair presentation of the financial position and the results of
operations for the periods presented.
NOTE 2 - Earnings per share:
Net income (loss) per share is computed based upon the weighted average
number of shares outstanding of 11,770,399 and 11,043,251 for the three-month
periods ended December 31, 1996 and 1995, respectively.
NOTE 3 - Non-cash equity transaction:
During the quarter ended December 31, 1996, $100,000 of short-term debt
was converted into 250,000 shares of the Company's common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended December 31, 1996 and 1995
Electronic Clearing House, Inc. recorded a net income of $50,000 for the
quarter ended December 31, 1996 compared with a net loss of $124,000 for the
quarter ended December 31, 1995. Transaction processing operations had a net
income of $278,000 for the quarter while research and development expenses
related to a pilot program for the United States Postal Service ("USPS")
significantly contributed to a net loss of $166,000 for Computer Based
Controls, Inc.("CBC"), an equipment subsidiary of the Company.
Bankcard processing revenue and bankcard transaction fees increased 61% from
$2,409,000 to $3,878,000, compared with the same period last year. Revenues
derived from the electronic processing of transactions are recognized at the
time the transactions are processed by the merchant. The increase in bankcard
processing revenue is primarily from the increase in the number of active
merchant accounts from 5,279 as of December 31, 1995 to 7,169, a 36% increase.
Additionally, inventory transaction fees from a national rental organization
increased 78% from $147,000 to $261,000, compared with the same period last
year. The Company's expanding merchant base and profitability is primarily
attributable to: the effective sales efforts of an independent processing-
related sales organization that is presently accounting for approximately 70%
of the Company's new merchant relationships; referral from the Company's
existing merchant base; the direct response to the Company's Internet Home
Page which accounts for approximately 20% of the Company's merchant growth;
and target marketing of merchant industry types which generally have higher
discount rates and processing volume as compared to a typical retail merchant.
A primary contingency related to processing profitability is the consistency
and multiplicity of the Company's primary bank relationships. Primary bank
relationships are necessary to assure access to the major credit card issuing
organizations and, presently, the Company has two primary bank relationships.
Additional primary bank relationships diminish the potential for disruptions
in processing operations that might occur due to changes in management or
ownership of one of the Company's primary banks. The Company has signed
letters of intent with two additional banks as primary banks. The Company is
making the necessary software enhancements to allow one of the new primary
banks to become active by the second quarter of fiscal 1997.
Bankcard processing expenses have generally remained constant as a percentage
of processing revenue. A majority of the Company's bankcard processing
expenses are fixed as a percentage of each transaction amount, with the
remaining costs being based on a fixed rate applied to the transactions
processed. Processing-related expenses, consisting of bankcard processing
expense and customer service expense, increased 60% to $2,988,000 from
$1,862,000 for the same period last year. This was in direct relation to the
increase in processing revenues.
Check guarantee fees have decreased 38% from $42,000 to $26,000 and related
expenses have decreased 52% from $21,000 to $10,000, reflecting the absence of
active marketing or development of the Company's check guarantee services.
Check guarantee services are not presently actively promoted for two primary
reasons; 1) negative check writer data are only available on California
activity while much of the Company's base of merchants is in other states, and
2) development focus and resources are being placed in bankcard processing and
terminal sales programs that are viewed by management to have a higher growth
and revenue potential.
The primary variables affecting equipment sales are inventory levels, software
design and development by the Company, the timing of customer orders and the
lead time required for delivery of such orders. The Company's primary
terminal system, the EB920, is a highly customer-specific terminal and for
this reason, as well as the financial costs related thereto, the Company does
not maintain significant on-hand inventory beyond depot requirements.
Customer orders have historically been in large quantities that exceed the
inventory amounts the Company maintains and such orders are typically received
only one or two times per year per customer. The time from receipt of the
customer's order to the delivery of the systems is presently a four (4) month
period, primarily due to the lead times of electronic components for the
system. In November 1996, the Company received an order for 2,379 EB920A
terminals from its national rental organization customer which is scheduled
for delivery in March 1997.
Revenue related to terminal sales is recognized when the equipment is shipped.
Terminal sales and lease revenue decreased 62% from $401,000 to $153,000, as
compared to the same period last year. The significant reduction in revenue
between the two periods is mainly due to the Companys equipment subsidiary
focusing much of its resources on performance under an award by the USPS that
generated no revenue for the period. Cost of terminals sold and leased also
decreased 56% directly related to the lower sales.
Research and development revenue increased 50% from $20,000 to $30,000,
reflecting an increase in fee-paid development work done for existing
customers. Research and development expense increased 43% from $63,000 to
$90,000 in direct relation to the increase in revenue.
Selling and general and administrative expense increased 11% from $659,000 to
$732,000, as compared to the same period a year ago. This increase is mainly
attributable to the 61% increase in processing revenue and the incremental
increase in operating costs related thereto.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had available cash of $313,000, $534,000 of
restricted cash in reserve with its processing bank and a positive working
capital of $388,000.
The Company received a $438,000 downpayment on an order for EB920A terminals
in November 1996. Accounts receivable increased $339,000 during this quarter
as a result of increase in processing activities and leasing activities.
Inventory also increased by $160,000 which was primarily related to the
inventory build-up for the USPS pilot program.
The report of the Company's independent accountant during the past ten years
has contained an explanatory paragraph as to the uncertainty of the Company's
ability to continue as a going concern resulting from recurring losses. The
profitability of the Company's processing activities diminishes this risk
significantly even though CBC is expected to continue to operate at a loss for
fiscal 1997.
CBC's activities are being focused almost entirely on the performance under
the USPS pilot program and other developmental projects are being postponed.
This concentration of energy and resources has resulted in an operating loss
in the last three quarters from CBC's activities. Since the development
portion of the USPS pilot program is nearing completion, continued investment
at the current level into CBC is not expected to be necessary in fiscal year
1997, and as a result, the operating losses for CBC are expected to be
reduced.
In November 1995, CBC was awarded a contract to design and build 575
Electronic Money Order Dispensers (EMOD) for the USPS, 400 systems to be
attached to USPS PC's and 175 to be "stand-alone" versions. The First Article
Test (FAT) of the CBC beta system for the "stand-alone" version of the EMOD
was completed in December 1996 and the Company is awaiting formal notice of
FAT approval from the USPS. It is anticipated that a phased deployment of the
systems will occur in the Dallas, Texas area beginning in the second quarter
of calendar year 1997. The USPS has advised the Company that they are having
difficulty in securing a printing company that is able to economically produce
the desired EMOD form stock with the necessary security components. This may
delay decisions regarding further deployment after the pilot program begins
and/or may generate the need for a redesign of the existing systems to
accommodate a modified paper stock. There is no assurance that a redesign of
the existing systems will be economically feasible for both the Company and
the USPS.
Based upon continued growth in its processing operations and the recent order
of 2,379 EB920A terminals, cash flow from operations is expected to be
positive in fiscal year 1997. As described above in "Result of Operations",
contingencies that could impact liquidity are mitigated by continuing success
in the expansion of the customer base and by the establishment of multiple
banking relationships.
In November 1996, $100,000 of short-term debt was converted into 250,000
shares of common stock. In January 1997, an additional $200,000 of short-term
debt was converted into 500,000 shares of common stock. The remaining
$600,000 of short-term debt is convertible into common stock at $.40 - $.50 a
share. The Company is currently reviewing its options to either 1) refinance
the $600,000 debt, or 2) effect repayment through private placement funds when
the notes become due in March and April of 1997 if the conversion option has
not been exercised by the noteholders at that time.
At December 31, 1996, the ratio of current assets to current liabilities was
1.16:1 as compared to 1.12:1 at September 30, 1996. The twelve-month average
collection period for receivables was 23 days for the three months ended
December 31, 1996 as compared to 20 days for fiscal year 1996. The Company's
annualized inventory turnover ratio for the current period was .93, as
compared to 4.50 for the fiscal year 1996.
When used in the Management's Discussion and Analysis of Financial Condition
and Result of Operations or elsewhere in this document, the word "believes",
"anticipates", "contemplates", and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from those projected. Those risks and uncertainties include changes in laws
and regulations affecting the Company's primary lines of business. The
Company undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
PART II. OTHER INFORMATION
<PAGE>
Items 1, 2, 3, 4 & 5
These items are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter
ended December 31, 1996:
Date of Filing Item Reported
None. None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRONIC CLEARING HOUSE, INC.
(Registrant)
Date: January 31, 1997 By: \s\Alice Cheung
Alice Cheung, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 313
<SECURITIES> 0
<RECEIVABLES> 1529
<ALLOWANCES> 351
<INVENTORY> 733
<CURRENT-ASSETS> 2824
<PP&E> 3258
<DEPRECIATION> 1785
<TOTAL-ASSETS> 5327
<CURRENT-LIABILITIES> 2436
<BONDS> 570
0
4
<COMMON> 121
<OTHER-SE> 2196
<TOTAL-LIABILITY-AND-EQUITY> 5327
<SALES> 153
<TOTAL-REVENUES> 4087
<CGS> 153
<TOTAL-COSTS> 2997
<OTHER-EXPENSES> 822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 51
<INCOME-TAX> 1
<INCOME-CONTINUING> 50
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50
<EPS-PRIMARY> .004
<EPS-DILUTED> 0
</TABLE>
